The fourth industrial revolution is disrupting some very basic mechanisms that have been facilitating massive growth in seaborne trade volumes over the past decades, and they could become outdated sooner than many people expect, explains Christopher Rex.
A lot has changed during the course of 2016, not least the international political landscape. Anti-trade rhetoric in the US presidential election, the UK’s vote to leave the European Union, massive migration challenges, the rise of nationalism in various countries and stark divides among WTO members have challenged much of the progress of globalisation.
Political tensions have been building for some years now but became truly visible in 2016 when public opinion was formally voiced in various elections, and have triggered some public backlash against globalisation.
At least part of the explanation can be found in the low economic growth that has crystallised since the financial crisis. Larger groups of people, particularly in the advanced economies, feel that they have been left behind by their governments.
Some low and middle-skilled workers have lost their jobs either due to trade and offshoring or, equally likely, as routine tasks have become increasingly automated thanks to technological innovation.
In many cases, workers have found it difficult to find reemployment and if they have, they have often had to accept lower wages. The only certainty as we leave the global financial crisis further behind is that the factors affecting global economic growth are becoming more complex. They reflect a combination of global forces — demographic trends, politics, technology — and a variety of local issues that may prove strong enough to become regional or international topics.
In the past, technological innovation was able to create more new jobs than it destroyed and combined with the advances in globalisation millions of people was lifted out of poverty. Today, the world economy struggles with low global economic growth and the number of jobseekers, mainly in emerging and developing countries, is increasing.
The employment outlook for many of the countries in Latin America, Asia (especially China), Africa and the Middle East has worsened in recent years. The world economic outlook is shrouded in uncertainty since the combined effects of the fourth industrial revolution (e.g. artificial intelligence, robotics, the internet of things, 3D printing and digitalisation) seem able to disrupt everything we know about economic growth, from labour markets to trade relations. The relationship between labour market dynamics and economic growth in the age of the fourth industrial revolution is complex but may hold the key to better understanding the outlook for the world economy and not least for shipping.
The question going forward is essentially: how to create jobs and economic growth for the millions of people that are ready to enter the global workforce and become consumers in emerging markets? Many are concerned that we are heading towards a future where the number of both white- and blue-collar jobs — everything from taxi and bus drivers to X-ray specialists and market analysts — will shrink. But how will the world population growth translate into economic growth if we are unable to create the millions of jobs needed? Urbanisation without jobs simply create slums. How will emerging markets integrate and prosper if future demand for a large pool of unskilled workers and/or for raw materials diminishes with the advent of the fourth industrial revolution?
These are important issues to consider since the integration of these workers into the world economy forms the basis of many growth outlooks, including the most optimistic for seaborne trade volumes. We do not have all the answers but we hope to spark a discussion of the possible outcomes because the composition of the world fleet is ill-suited to the expected transformation of trade volumes and patterns.
The world fleet is young, the average vessel is larger than in the past, and more vessels are on order. The general outlook for the shipping industry is therefore challenging. Freight rates and secondhand values are low across the board, and shipyards are closing, or reducing capacity, due to overcapacity.
The shipping industry is simply positioned for growth in seaborne trade volumes and is very vulnerable to forces — ranging from ageing consumers to technological innovation and anti-trade politics — that may reduce growth in trade volumes. Technological innovation will continue to accelerate globalisation, but the impact on international trade volumes might diminish. We strive to take these issues into account when we continue to argue that seaborne trade volumes in 2030 will be little higher than today, growing by an annual average of just 1%.
The industry continues to struggle with overcapacity which is stubbornly infecting most segments; from Container and Dry Bulk vessels to Crude and Product Tankers, Gas Carriers and Offshore-related vessels. In short, the shipping industry is in the midst of a process whereby supply continues to expand while medium to long-term seaborne trade volumes seem to be on the brink of stagnation or are facing very low demand growth.
This apparent decoupling between supply and demand is expected to introduce massive changes to the competitive landscape of the shipping industry within the next five years.
We believe that the forces currently in play will introduce far-reaching changes that redefine or augment the established value propositions within the shipping industry. Some players are already adapting successfully, while others are lagging behind. We believe digitalisation could be the way forward for the industry.
In the past few years, we have seen digitalisation bring its first benefits to parts of the shipping industry, yet enormous untapped potential remains. In time, digitalisation will transform the way the shipping industry functions and has the potential to unleash global opportunities for value creation.
Promising pockets of excellence already exist across the industry, demonstrating that the potential is real. But digitalisation is not only a means of optimising a company’s existing operations; it also gives both disrupters and traditional shipowners the power to disrupt existing value chains, enter new sectors and create innovative business models.
In today’s market, the hardware of the industry is increasingly becoming a commodity. Modern vessels offer little opportunity for differentiation. However, the data they generate may prove extremely valuable.
The shipping industry should increasingly treat data as a competitive advantage. Trade data fuels the algorithms that provide insights into markets, customers and business processes. By creating a trading platform from which data is stored and analysed, various players within the ecosystem of global trade – from shipowners to suppliers, brokers, banks and insurance companies – are able to cultivate existing business models and create innovative new business models that tap into value far beyond the current scope.
For shipowners, the trade data could turn out to be at least as valuable as their assets were in the past and may enable significant cost reductions from efficiency gains. The impact on existing business models could be profound. Within the next few years, the existing value proposition could lead the shipping industry to a tipping point: either disrupt or be disrupted.
The shipping industry is still at an early stage of digital disruption. New market mechanisms are likely to be developed in the years to come. Some may disrupt large parts of the existing markets and change entire value chains, but we believe it is better for the industry to disrupt itself than be disrupted by others.
We hope to develop a view of the deeper forces behind digital disruption in the shipping industry. It is our ambition to spark a discussion that encourages our readers to imagine the shipping industry in a digital future.
Imagine transportation as a service distributed on a digital platform: a digital platform would give market-makers an opportunity to perfect the connection between buyers and sellers globally.
This is clearly about vertical integration, but the scope could be much broader. It is about unlocking markets by reducing transaction costs, increasing transparency and reducing information asymmetry.
Taken as a whole, these forces hold the potential to blur the boundaries and definitions of industries and make more extreme outcomes a part of the strategic calculus. The shipping industry could potentially come up with an entirely new value proposition that trumps the one it already has.
These platforms tend to harness first-movers and network effects and by redefining the standards, a platform may force the rest of the industry to integrate into a new ecosystem built around the platform itself.
The shipping industry is centrally positioned but could likewise be marginalised if it fails to move into the digital space. The champions of disruption are the ones that are creating a new and significantly enhanced value proposition for customers. Such a new value chain holds the potential to redefine the ecosystem of world trade.
Imagine the potential spill-over effects such changes could have. If a new platform or several platforms were to be built on technologies that included blockchain technology (i.e. distributed ledgers), a wide range of intermediate industries (e.g. ship brokers, insurance companies, spare part suppliers, banks and several others) that are currently participating in the facilitation of world trade could likewise be at risk of losing major parts of their current business.
The ecosystem of the maritime cluster needs to adapt to a new digitalised industry. The result could be not only the destruction of sizeable profit pools but also the emergence of new value drivers. Some investors seem to believe that past dynamics remain intact and that the shipping industry will be on its way out of the doldrums in a few years. We certainly hope that these expectations come true but we urge market participants to consider some of the structural challenges that could be transforming the long-term outlook for many parts of the shipping industry. Well-known futurist K D Adamson has termed this phenomenon the ‘New Seaconomics’.
The advent of the fourth industrial revolution is disrupting some of the very basic mechanisms that have facilitated massive growth in seaborne trade volumes over the past decades. These mechanisms could become outdated sooner than many people expect.
If these trends gain further ground, they may represent a significant risk, not just to the shipping industry but to the global economy, since they have the potential to hold back economic growth and global trade in the years to come.
The potential consequences hereof may or may not come into play within the lifetime of vessels recently ordered and could have a major impact on the shipping industry. Some of the scenarios we envision will play out, while others will be overtaken by alternative scenarios or the status quo will prevail, although the latter is less likely.
Still, it is important to keep in mind that long-term trends only define the dynamics in play. These dynamics may easily be outgunned by temporary forces defining short-term demand. Even in oversupplied markets, temporary forces may become sufficiently powerful to raise freight rates and secondhand values over several months, sometimes even longer.
It is therefore important not to interpret short-term spikes as signs of a more lasting recovery and to continue to show restraint with regard to ordering new vessels.